Reprimand or Warning Orders by NCLT

UW International Training & Education Centre for Health
Private Limited voluntarily filed an application before the National Company
Law Tribunal (‘NCLT’) with respect to a matter pertaining to section 56(2)(a)
of the Companies Act, 2013 (the ‘Act’) for transfer and transmission of
securities.

In this regard, section 56(4)(a) of the Act states as
follows:

Every Company shall, unless prohibited by any provisions of
law or any order of Court, Tribunal or other authority , deliver the
certificates of all securities allotted, transferred or transmitted-

within a period of two months form the date of incorporation,
in the case of subscribers of the memorandum;

Hence, the company should have delivered the certificates of
all securities allotted, transferred or transmitted, to the subscribers of the memorandum
of association (MoA) of the company within a period of 2 months from the date
of incorporation, in case there are subscribers to the MoA of the Company.

However, in the case of UW International, although the
company was incorporated in New Delhi on 15 October 2015, due to numerous
procedural requirements the bank accounts of the company were opened only on 26
April 2016. Accordingly, the company received the subscription money on 27 April
2016 and 6 May 2016 from the subscribers to the MoA of the company.

Since UW International was incorporated on 15 October 2015, the
share certificates should have been issued to the subscribers of the MoA by 15 December
2015. Nevertheless, as stated above, due to the delay in opening of the bank
account of the company to deposit the subscription money, the certificate was
not issued within the prescribed time limit under the provisions of the Act.

Penalty prescribed for
the aforesaid matter

The penalty for default in compliance with section 56(4)(a)
of the Act has been prescribed in section 56(6) of the Act, which states as
follows:

Where any default is made in complying with the provisions
of sub-sections (1) to (5), the company shall
be punishable with fine which shall not be less than twenty-five thousand
rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with
fine which shall not be less than ten thousand rupees but which may extend to
one lakh rupees.

[Emphasis
provided]

Pursuant to section 441 of the Act, the following offences
are considered for compounding:

(a) Offence
punishable with fine only;

(b) Offence
punishable with imprisonment or fine; or

(c) Offence
punishable with both.

Therefore, the aforementioned penalty happens to be a
compounding offence.

Order of the NCLT

In the instant case, pursuant to the aforesaid provisions of
the Act, the minimum penalty on UW International should have been Rs. 25,000,
while for the defaulting officers it should have been Rs. 10,000. Moreover, the
maximum penalty on company should be Rs. 5,00,000, while on the defaulting
officers it should be Rs. 1,00,000. However, the NCLT
held that the concept of minimum fine on compounding matters is not
mandatory, and the NCLT may even consider reprimanding the defaulter or issuing
a warning as part of compounding of an offence. Therefore, considering the fact
that the delay in issuing the share certificates to the subscribers as
mentioned in the MoA was not within the control of UW International, the NCLT
imposed a minimum fine of Rs. 10,000 on UW International and each of the
defaulting officers. The NCLT also
ordered that the fine imposed on the defaulting officer shall be paid out of
their personal accounts.

Conclusion

This case is an example that brings out the actual intention
behind imposing minimum penalty on the defaulter(s). It is not necessary that
fine imposed on the defaulter shall be solely in monetary terms. The consequences
may also be imposed by way of reprimanding the defaulter or by giving an
appropriate warning to the defaulter. The entire rationale behind imposing a fine
implies a warning to the defaulter or as a deterrent. This case suggests that
there might be other means to achieve the objective of the legislation.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

Some Companies like Godrej Foods Limited wherein a scheme of arrangement was made two ata time. One was emerge of Godrej Consumer Products Limited from Godrej Foods Limited and another buy back of Godrej Foods Limited shares without taking delivery of shares? At the same time buy back was followed and no share certificates so far issued shares to Shareholders of the Godrej Foods Limited ? Every the other week you may come across Loss of Shares Of Godrej Consumer Products Limited. No body takes care. Company claims that it was processed as per Scheme. fully??

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